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tv   Options Action  CNBC  May 25, 2012 5:00pm-5:30pm EDT

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gone wrong. the action starts right now. >> live from the nasdaq market at the world's largest exchange, we will have more on the investment, but we will start off with the markets. the dow had their west week in months. is there a bull case to be made? let's go to the money and find out. it seems like consensus is this is a repeat of 2011. >> it's interesting because one of the things you want to do as an investor or trader is as everyone is looking in one direction, you should be being looking in another. that might give people pause and have them looking in another direction. only 15% of the stocks and the s&p are trading cheap relative to how much they are moving around. world bonds indicating that armageddon is upon us. saying that if greece had a dizzy orderly exit, stocks will
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be down 50%. when everyone is having this prognostication, what you need to do is say to yourself, are stocks getting cheap? a lot of them are. >> the newest member of our team, enis tanner, what it is your thoughts on the market? >> the one pointer i would make is everyone is focused on europe. what's different is the sell off we have seen recently and that global growth is showing serious signs of deteriorating. brazil has capital outflow and we had the central banks intervene to buy their local currency and sell dollars. you are seeing international leadership like ibm, mcdonald's, and cater pillar all losing. that's a significant problem. >> that's a great point when you are looking at greece and get afraid to look at china and be hopeful, what we saw in the vicks, people are afraid of greece.
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i don't know why. they are a small story now and it's ril test live contained. they were never lower today which is stunning on the day on the friday before a three-day weekend. given that the s & p was down two points, you would think it was going to get crushed. this is the sort of risk thaw don't get compensated for. >> we are seeing some floor in home prices. we are seeing low oil prices as a stimulative effect. we will wait and see whether they recognize it as a fiscal cliff. there is potential balance if we start to see the movement. the important thing is that you have to recognize that we are on a precipice. that doesn't mean you exit the markets entirely. i do think people should take a electric at opportunities in the names that could be poised to spring. >> would you rather invest and get a dividend yield or treasury skpes get 1.74% and yield with
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no upside? >> what's interesting is there is a chart we put up on the website and the same chart that scott is talking about, but it goes back 100 years. from 1920 to 1960, the yield was consistently lower than bond yields and in some cases more than 5%. it depends on the circumstances in the market before you just take that yield. >> let's say you believe out there that the market will rebound and you are asking yourself what's the best play to play at this point? let's go to carter who is highlighting one particular stock. what is it? >> we have ibm here this afternoon. let's look at a few charts. the same time frame and drawing the lines in a different way. the first is this. after a break out earlier in the year, a good technique is to buy a stock that falls back to the point at which it originally broke out. that's what's happening and we sold off from 210 to 195.
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another way to you draw the line is the same one-year chart. where the sell off leads us. right on trend. that too shows a good place to play, play, play for a bounce. a 30 way is not to draw any lines at all and look at where the stock is in relation to the smoothie mechanism. we are right on the line also and that shows a good place to buy a strong stock that is giving you an extra point by selling off. two more charts. one is five years and one is quite long. it shows the trend for the last five years and this is an orderly thing. that is the very definition of relative strength. here is a very long-term chart and the same judgment. get long ibm and take advantage of the weakness. . >> carter is bullish and you raise an interesting point before. that is the role of consensus. when everyone is going one way,
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ibm as a stock is the 1 that everybody has confidence in. >> they have reason for feeling that. number one, it's not expensive relative to earnings. there is growth over the last five years and we are looking at 4% growth and this is a company that over many, many years has proven that they are dynamic enough to make adjustments to accommodate any kind of environment. they transformed themselves a couple of times. with that back stop, you feel like if i am going to get involved, maybe this is one of them. you have the back stop in terms of valuation and in terms of really good management. this is the kind of name that you will try to make a look at. you probably have confidence in it and the options that are as consistent are among those that will be relatively inexpensive. >> mike is obviously bullish and buying a call. here's how you make money.
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you want the stock to rise more than the stock of the trade. below that you will see losses. it is probably the simplest trade you can run, but walk us through the trade. >> i'm looking at the july 2.05 call. that's less than 1.5% of the current stock price. we're trying to take advantage of low premium and the stock price depressed. i think that you could be poised to spring, but these guys brought up excellent points on the downsize risk. i am trying to avoid that with a simple upside bet. >> what are do you think of ibm? >> dan actually did a put spread in ibm buying the june 200 and 185 put spread and the idea would weaken and ibm has more than 50% of the sales. we are saving the opposite side. >> i would point out that the highest core slagz to s&p 500.
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there is multinational exposure and that is a good point. he timed that well and sometimes we might be doing this effectively, sometimes you buy the stock before it declines and then you might take a bet going the other way. >> that's a crazy pocket score. >> i don't know how i didn't know that. stocks versus options. better have a big bank account. 100 shares is almost $20,000. the leverage to the upside is $215. let's move on and get to the story of the after hours session. chesapeake energy getting a boost after karl icahn exposed a stake in the companies. he is replacing at least four members. kate kelly has been pouring over the filing and more activists might follow suit. what's the latest? >> fascinating battle here just being waged between icahn and the ceo of the company who with
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can be described as frenemies. icahn was a friendly investor and got out of that profitably and helped effect changes including the sale of assets for a positive dialogue for others. this letter he said are calls for change have gone ignored. he had a dinner recently where he asked for representation on the board and he was blown off and the board is working in isolation to find a replacement for a chairman. the process has been unacceptable and the company is unacceptable and a $16 billion funding gap. here's my favorite line. the board is woefully inadequate speaking about the chairman's search here. having the current board select the chairman without allowing for representation is akin to asking the fox who has gone in the hen house to choose another fox to assist in standing guard over the remaining hens.
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icahn has a 7.65% stake that makes him the third largest shareholder, but more could be happening that we don't know about. southeastern asset management was filed to be activist. they made their concerns unknown and think chesapeake should be a take own target that. leaves wellington, the second largest and not saying anything yet, but could happen. >> you have a question? >> yeah. we know icahn took a stake in 2010 and sold if t for a praft that he inyishiated. did he have a mention about sales again that to pay down the near term debt? >> he talks about that being a crucial priority in terms of paying down debt. they have the long-term debt and the shares are off 55%. so far from the 52-week high that he notes in the letter. they have to do something about the gap and the credibility gap
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may be more important. i think it goes without saying that it is mentioned he wants to continue to see the asset sales. they are looking at selling assets in the d.j. basin in the rocky mountain area and the permian assets. they have good assets despite the downdraft and the downswing in oil prices. they need to move on this and make sure they can monitize what they own to deal with the funding issues. >> quickly, yesterday we were reporting that icahn had a 4% stake. sizable, but not nearly as much as southeastern. any word on whether or not icahn has been in talks? as i understand they would have to file another file figure they were working together. >> not that i'm aware of. i would assume that the activist shareholders would be having a dialogue. southeastern has been keeping the cards close and they did disclose a letter and there were comments on may 1st when
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chesapeake announced the separation of the rules. they were at mason hawkins. the chief investment officer supported the move. they telegraphed some of their opinions, but have not agreed to do interviews and got them into any details about what else they want to do and as far as they are talking to icahn, he is comfortable operating as a one-man band, but we don't know. >> we appreciate it. i'm curious on your take on the company. there is a couple of different issues at interplay. can icahn do something with the 7.6% stake pitted against a larger shareholder and the fundamentals? >> it's an interesting story. chesapeake over the last two months had the worst period in corporate history. he started the company in 1989 and over two months had serious heat put on him.
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the other thing to note about the activist investor in this case, even the best investors in the market slightly over 500 and picked the wrong stories here. i think the underlying business is what's the fundamental issues. a huge debt load and they have been hurt. >> using the put spread and they have done this many times. always good to crack open the playbook. they are buying one put and the lower of the same expiration to cut the cost. they are bearish. you make the most money here and where your profits will be capped. with that said, you walk us through the trade. >> you are buying a july 14, 12 put sprechltd the premium will be 50 cents and the max profit is 1.50.
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it's worthless above $14. july gives us two months and we think that's enough time to retest the lows of $13 which was last week. in addition that, you -- i wouldn't short the stock. it's a volatile story and i would definitely use a put spread. >> you definitely can't short the stock. you are talking about a $30 billion enterprise value and close to a third with equity. if the story turns around, that can be in your face in a bad way. i don't see that dropping below the low. natural gas prices do seem to be putting in a floor. people will wait and see what he is up to. he is not trying to buy this company. it's just too big. he will get involve and the guys from southeast will get involved. this is what everybody needed to turn around to get in there and tell the board what's what. >> here owns cvr energy.
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>> he a lot of swings and misses and he won't get much accomplished. i don't see it going much lower. >> not buying the turn around story and not believing in icahn? you might want to consider the stock and have money in the bank. it carries unlimited risk. the 3-1 pay out and costs $50. that is a legendary billionaire. impossible to lose your money and spend $50 and triple your money. the choice is yours. got a question? send us an e-mail and the address is options action. we will answer it right after the show on our website. "options action" and we post a lot of trade recaps so check it out. here's what's coming up next. >> she's "options action's" biggest fan, but the zynga trade is against her. can we find a way to save her from farmville hell? find out when "options action"
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returns. time for pump up the volume, the names that were heating up sizzle this week. looking for gold? so are these guys who are on the hunt for the projections around north america. if a penny save side a penny earned, they are in good shape. they hold 10 billion pounds of popper and options traders went bonkers for bullion and the company will soon strike. who is it? the answer when "options action" returns.
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where were investors pulling up the volume? call volume is 11 times the average daily volume. >> welcome back to "options action." no one is perfect and when a trade moves against you, you want to say dude, fix my trade. we are doing that with ashley in new york who made a bullish bet on zynga. take a look. >> just because you risk less, doesn't mean you always make more. that's what happened with "options action" super fan ashley from new york. ashley was watching the facebook ipo and got swept up in the hoopla. they don't start trading until may 29th. ashley thought i wonder if there was an overhyped link. better go with zynga, thought ashley. i heard of farmville, but there
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was another problem. 100 shares were nearly $1,000. so to make a bullish bet, ashley told the july 9th strike put and collected $1. that dollar is the most she can make on the trade, but in order to keep all that money, she needs the stock to stay above that strike put price or above $9 by july. it gets better. that's because of the money she took. she can make money if the stock goes up, down, or nowhere at all. a buck for doing nothing? that sounds as believe as as an internet company of $100 billion. >> this seems like a big deal. >> what's the trade off? when ashley sold the put, she hoped the stock would go higher or stay above $9, but zynga shares fall below, ashley is obligated to buy zynga at that strike put price or $9. with the dollar she collected for selling that put. she couldn't begin to lose money until the stock falls below and
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that puts the price by more than a dollar that she put in or make money whether the stock goes up or down or nowhere at all. below $8, she will be on the hook for losses. since a time of the trade, shares have gotten zinged to the tune of 27%. leaving ashley a loser. "options action" number one fan is having a worse week than this guy. she only has one request. >> help me, options action! help me fix my trade! >> sad story indeed, but maybe this will cheer her up. had ashley bought 100 shares of zing is stock, she would be out $250. if she closed, she would look at $175. not great, but definitely better. ashley is one angry bird looking for advice and joins me on the phone. it's great to speak with you. what were you thinking here?
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>> definitely was looking for a short-term sector construction play going in the facebook ipo. i grossly under estimated the downside potential. at this point i can put the stocks and it's only at $8. should i sell additional puts or is there anything else to do to recover the losses? >> a lot of people are in the same boat. >> do not sell more puts. selling puts to get long stock is great. you are long the stock and effectively long the stock. it has about 25 cents worth of time value and you have to move on. if you don't like the stock, i would buy the put back. if you top the do something with facebook on tuesday when options start trading, that's what i would do. >> i would agree zynga is a bad-looking stock. it would get a bounce and it did. if you did the trade, that was your big opportunity.
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it got that move. that's the other thing. you have to trade and be jim bell when you get the pop you were looking for. take advantage. >> do not sell the puts. >> you have a number of options to think about. ashley from new york. up next, the final word from the options pits.
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. >> options traders will have a lot to talk about when options start trading and that will be a widely anticipated event. they will discuss the actual trading of the options. now time for the final call and the last word. pick it up. >> this week is how to rehab the tut sale with tiffany. >> where there is smoke, there is fire. we are buying. >> mike? >> chesapeake is distressed, but look for the place that the options are cheap. >> our time expired. for more "options action," go to our website. we will see you back here next friday at 5:00 and meantime,
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three stores that can make you money next week. how low can it go. nearing two year lows and why the pain is just starting and how you can make money on it right now. next week's jobs report will be better than expected. how traders are setting up tonight and gold to 5,000. one top strategist will think so and how you can get in. "money in motion" where world events are winning trades. let's go to the money matchup and the euro dr
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